While we may not be at the new highs yet, we are very close.
After six months of volatility and blunted expectations investors are like a kid in the backseat on a long trip. Are we there yet? No, but we are close. The S&P is only 37 points away and the Nasdaq 71 points. It is entirely possible we could touch those prior highs this week.
Investor sentiment has improved significantly despite the expected 2% decline in earnings for Q1. Nobody seems to care and out of the first 25 S&P companies to report, 82% of them have beaten those reduced estimates. This suggests the actual numbers could show positive earnings by the time the cycle is over.
The A/D line on the S&P has gone vertical and very bullish. That record high level is acting like a tractor beam that is pulling investor sentiment higher. This is typically the case, until that level is actually touched and reality returns. Profits are taken then investors wait to see if the market is going to continue higher or fall back to give them another entry point.
Even more positive for the market, the A/D on the small cap stocks has also returned to a new high. This is very bullish because the small cap sector is the sentiment indicator for fund managers. If small caps are rising, fund managers are buying because they are not worried about an impending decline.
The correlation between the Dow and the Russell confirms the bullishness building in the small caps after Friday's resistance breakout.
We are probably seeing the beginning stages of a fear of missing out or FOMO rally. When stocks rally to new highs, TV, newspapers and investing newsletters all tout that fact and anyone with cash to spare tends to rush into the market. That is why late stage gains can be strong.
Evidence of this is the recovery in the Bullish Percent Index. The index is now showing that 75.2% of S&P stocks have a buy signal on a point and figure chart. This is even higher than when the last market high was made back in October. Cash is flowing into the market.
Volatility is collapsing and that is both good and bad. While volatility can stay low for long periods, it does represent complacency in the market and very low expectations for future negative events. In this case, there are multiple events that could be very negative. A hard Brexit next Friday and a collapse in the China trade talks could easily upset the markets. Investors do not seem to be worried today.
The Semiconductor Index has risen 38% in 2019 and the S&P has gained 23%. The rise in the chip sector has lifted the Nasdaq with the help of the FANG stocks. The FANG stocks have been choppy overall, but they are gravitating slowly higher. Apple has been a major supporter with 8-days of gains. Apple's earnings are going to be a key event on April 30th and could be a market turning point.
The Nasdaq has one minor resistance hump between it and the 8,109-high back in August. The 8,070 level is close enough to the high it may not matter but time will tell.
The S&P has no material resistance between it and a new high at 2,930. Reaching a new high on the S&P should be a foregone conclusion.
I believe the markets will remain positive until those new highs are reached. What happens at that point is anyone's guess. Do investors take profits ahead of the summer doldrums or hold positions in hopes of a China trade deal? I have thought for weeks that the announcement of a deal could cause a short-term spike but then turn into a sell the news event ahead of the summer. It will be interesting to see how long the negotiations drag out and how long investors remain interested.
Enter passively and exit aggressively!
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